Warren Buffett Has Spoken: How to Invest in the Stock Market During Inflation

As one of the richest men in the world, it goes without saying that Warren Buffett knows a thing or two when it comes to investments. Throughout the course of his long career—and, by extension, success—he had always advocated investing in stocks and staying the course, no matter what.

His word, of course, is gold to many pundits all over the world. But what many probably do not realize is that Warren did not achieve his meteoric level of success without being cautious, as well. While he is no stranger to “dip buying” of stocks, he also advises caution and being wary of a market that is too good to be true.

Indeed, if there is one thing that Warren seems to be rather fearful of, it is this—inflation. And with today’s markets caught in the crosshairs of inflation yet again, it is a good idea to remember all that Warren Buffett had ever said about stocks in order to better understand why stocks are moving much too fast at present. What makes Warren an expert on inflation is the fact that he lived and invested in one of the most famously volatile periods in the United States. We are, of course, talking about the late 70s and early 80s when inflation hit a whopping 14 percent. And while this is undoubtedly the greatest macroeconomic failure of the country after World War II, Warren not only invested heavily during this period, but he also reached unprecedented levels of success.

Of course, who can forget that in June 2008, Warren predicted an “exploding” inflation after gas prices went up to $4. Less than two years later, the Federal Reserve was forced to continue its program of quantitative easing. For his part, Warren did not send them an admonishment for politicking and inaction, but rather, thanked them in an op-ed for the actions that they did take—but not without the warning that keeping to the same policies will lead to widespread inflation.

These are just the tip of the iceberg in terms of inflation where Warren Buffett is concerned. Indeed, there is no better person to discuss inflation, and here are some more nuggets from the great man himself to remember with impending inflation upon us all.

Never forget inflation, especially when you are doing great.

Once, when his company, Berkshire Hathaway enjoyed a period of particularly good performance. So good, in fact, that the business earned an impressive 20 percent on capital. However, instead of “drowning in a sea of self-congratulations”, he warned that inflation will ultimately determine if this performance will, indeed, produce successful results.

In periods of high inflation, the dominant variable is not, in fact, earnings.

Normally, investors would consider corporate financial statements as law, as far as figures are concerned. This, of course, includes the company’s earnings for the fiscal period. However, Warren warns that this is no longer the “dominant variable” in terms of earnings for investors. Instead, he advises looking for “gains in purchasing power.” This is because corporate investment becomes infeasible due to the tax on capital that goes hand in hand with high inflation rates.

Get to know the “Misery Index.”

The investor’s “Misery Index” refers to the sum of the prevailing inflation rate and the percentage of capital that the individual investors need to pay before they can access their share of the earnings for the year. When this index goes over the rate of return on equity, the real capital or purchasing power shrinks, despite having no expenditure.

Focus on companies that consume less cash.

Usually, as inflation increases, companies tend to maintain the volume of their business by spending all their internally generated funds. While the numbers may seem attractive, these numbers are just that—pretty—and they normally do not convert. Instead, invest in companies that are able to handle increased business and increased prices without spending a lot to achieve them.

Inflation is inevitable and has no solution.

In 1980, Warren wrote that low rates of inflation are nonexistent. However, inflation is a man-made phenomenon, which means that it can be mastered. This means that despite all the problems and headaches that inflation brings, there is hope.